Worldwide: Ryan Luke, Founder and CEO of short-term rental management agency Luke Capital Group, discusses what the future holds for the rental/rent-to-rent arbitrage business model and what its potential success will depend on.
Rent-to-rent, as it’s known in the UK, or rental arbitrage as it’s known around the world, is a great strategy for getting into the property business. Especially if you have limited or no funds, as I discovered when I started my journey several years ago.
The power of strategy combined with the short-term rental game provides a great platform to be able to use other people’s properties and make a substantial profit from guest accommodation – a much higher rate per night combined with the during the month than what you will pay for your homeowner’s bills and operations.
However, like any industry that offers a good thing, there are plenty of people jumping on the bandwagon. Unfortunately, a lot of unprofessional and sometimes unethical people can spoil it for the majority operating in the right way. It doesn’t take much for the news to pick up a post from an Airbnb guest who destroyed a property. Ultimately, this makes landlords very nervous about renting their properties to short-term rental providers like us.
Which, in turn, makes the acquisition part of the process much more difficult. But not impossible.
The importance of trust
Trust is a huge role in any business. However, I think it’s even more important in this business. With your guests, you will need to ensure that the money is protected; this is now certified by [global verification and membership platform] I-PRAC which is a huge step in the right direction in terms of professional operators working under a banner that identifies who is trustworthy and who is not.
However, there is still a role to play at the other end – landlords being able to trust operators to look after their properties, pay their rents and manage the property the way they have intended to manage them in the contract that they sign with the owner.
Coming out of the pandemic, owner confidence has waned somewhat. Many operators struggled to keep their heads above water during the crisis and gave up the keys, especially those who had offered rental guarantees. This has left a sour taste in the mouths of the owners and therefore they may not want to re-enter into such a contract with an operator.
I personally paid every rent during the pandemic because I knew it would benefit my business in the future and that’s exactly what I did. I’m a firm believer that what happens happens – I knew that if I supported the landlords when they were going through tough times and expected rents to go unpaid, it would pay me back. That’s exactly what we did – we became the first choice for all their other properties and all the new acquisitions they had purchased as well.
The Growth of the Rental Arbitrage Model
When you focus on landlord care, your rental arbitrage game needs to be well placed and able to last for decades to come. I don’t think the industry is going anywhere. In fact, I think it will only get bigger. Many hotels have now begun to operate as automated, self-check-in Airbnb-style properties, and the traveler is now looking for more than just a hotel room. This lends itself well to properties that we typically rent out to owners – apartments, villas, houses, etc. – because they have all the amenities that a customer is now looking for for their experience, which generally revolves around lounge areas, televisions, kitchens. and a home away from home.
Don’t get me wrong – many cities try to make life a bit difficult with maximum stay rules and/or outright bans on this style of rental. However, there are still plenty of cities that allow it, and quite often properties outside of cities work incredibly well – professionals need to travel and the majority of corporate stays are in locations outside of city centers.
I also think many governments, especially in the UK, have done themselves a disservice to landlords during the pandemic. Their increased protection rules for tenants quite often left landlords dry. While there were plenty of short-term rental operators who returned keys, there were also plenty of landlords who received no rent from tenants; they were protected for months and months from paying any rent before they could legally be evicted. It did not please the owners and left a slightly bitter taste in the mouth.
As such, it opens the door to professional short-term rental companies that can echo reliability and an already established brand. I think these are the players who will succeed in the market in the future compared to those who treat it as a hobby.
The observation of the professionalization of the short-term rental market
The game has changed since the pandemic. The standards your property must now meet and the flexibility of your operation to get guests in and out have been taken to a new level – a level that only professional hosts will be able to compete with in the long run.
Regulations are coming and are already in place in many cities around the world. Personally, I think this is a good thing for professional short-term rental hosts and also for guests. This ensures they are protected, staying in safe environments, and that hosts are doing what they need to do to provide an experience that provides value for money while protecting guests as well as the property.
At the moment the real estate market is very hot and landlords are able to find tenants very quickly, especially in the UK where the housing shortage is only getting worse. Councils cannot approve planning quickly enough, which means competition is fierce and rents are going to be higher than before. But we are also seeing an increase in demand for short-term rentals and as a result, average daily rates are also increasing. This helps pay the high rents while making it a very profitable business overall.
The process of renting from a landlord is fairly straightforward, and if you just focus on finding out what their needs and pain points are, you’ll more than likely be able to come up with a win-win solution and acquire a lot of goods on this strategy which will serve you for a long time. The landlords do not want tenant turnover and would much prefer a long-term tenant who takes care of the property every day of the week. That’s what we can offer as professional operators and that’s what will help the industry continue to thrive in the years to come, as more and more people look to book holidays through travel platforms such as Airbnb and Booking.com – they have opened the doors for any host with a property to be able to look after guests.
What does the future hold?
Personally, I see the game of short-term rentals combined with rental arbitrage continuing for decades as more properties are developed and more landlords decide who they take in their properties. Let’s be honest, the badder the realtors – there are a lot of problems in this industry that could be fixed quite easily, but that’s not the case. I think it plays into our hands again, especially when we talk directly to landlords who have had bad experiences with real estate agencies.
I recently expanded my business internationally using the rental arbitrage strategy and found it to be exactly the same. Landlords are experiencing the same difficulties and want to move away from empty properties that have potentially been damaged by previous tenants. They are looking for a long term strategy with lower risk and that is exactly what we can offer them as professional traders – that is why we have gathered a lot of stock in places like Dubai using the exact same principles that are needed for a UK stock lot.
I can’t stress enough being a professional operator in this game if you want to survive. I think there have been more than enough signs of that now in terms of standards, regulations and even how customer behavior is starting to change, in terms of who they book with. All you have to do is research who your avatar is and start asking a few questions to find out what really motivates them and what drives them to book a certain property. What you find at the top of the list is brand loyalty, trust in the brand, and knowing that their money is safe – they’re going to show up at a property that matches the description and live the experience they anticipated when booking.
The more views you have, the better. And the more you can show that you are a professional operator with a well-functioning clean website, with an easy-to-book platform, a user-friendly profile on the booking channels and everything you expect from a professional company, you will succeed in this incredible industry.
However, if you are taking shortcuts and not providing the service and product you are selling online [unfortunately, many do], then the business model is flawed and your success will be limited. This is where the rental arbitrage game breaks down as the host cannot generate enough money to pay the rents and ends up having to return the keys to the landlord; it puts a negative spin on the whole industry for everyone else who operates professionally.
Conclusion
In summary, I think it’s a great game and it not only got me into the short term rental business, it also helped me build a portfolio of assets using the cash flow generated by my rental arbitrage portfolio. I think the industry is here to stay for a while, so anyone willing to work hard and operate like a professional brand will have great success over the years to come putting all the pieces of the puzzle together. I find it very rewarding, as so many hosts have, because the industry fits the life plans of so many people.
The fact that you can operate these types of businesses from your mobile phone, pretty much anywhere in the world, and that gives you a lot of flexibility – that’s why it’s such a popular strategy for s ‘involve.
Comments are closed.